Labor Market Immobility and Incentive Contract Design

Abstract

Research suggests that restricted labor mobility discourages managers from investing in human capital and reduces firm value. However, whether firms re-incentivize managers to mitigate its adverse effects remains unexplored. We find that after the adoption of the inevitable disclosure doctrine (an exogenous negative shock to managers’ mobility), firms convexify equity incentives and lengthen the exercisability of new option grants, especially for managers facing greater ex-ante mobility. Furthermore, treated firms become more likely to reprice options following bad luck. We provide causal evidence that labor mobility restrictions affect executive incentive compensation design and that firms react in an optimal contracting manner.